Oregon has the right idea on corporate taxes, Governor should focus on administration

The Nike campus in Beaverton, Oregon. Nike looks to lock in its corporate tax rates which only account for revenue it makes in the state of Oregon. Photo posted at The Oregon Economics Blog

Governor Kitzhaber has called the state legislature into special session to give him the authority to make special guarantees to big employers to stabilize their tax structures for specified periods.

This proposal is addressed to an arcane aspect of corporate income-tax policy called apportionment. Apportionment determines how much of a multi-state business’s income is subject to in-state taxation. Most states apportion corporate tax liabilities on three factors: in-state revenue, employment, and assets. For example, if a business earned 5 percent of its revenue, employed 25 percent of its payroll and located 45 percent of its investment in plant and equipment in Oregon, 21 percent of its total income would be subject to Oregon taxes. Recently Oregon changed its corporate tax structure to apportion it on a single factor: revenue. In the example I just cited, only 5 percent of the business’s income would be subject to in-state taxes. The reason Oregon abandoned three-factor apportionment is that it taxes and, thereby, discourages two things that we want to promote: employment and productive investment.

How is single-factor apportionment working for us? Evidently, fairly well. Since Oregon moved to single-factor apportionment, it has outperformed nearly every other state. In fact, only North Dakota’s inflation-adjusted gross state product (GSP) increased faster than Oregon’s during this period. Moreover, Oregon has gone from a middling state in manufacturing to number one, measured in terms of the rate of growth in manufacturing plant and equipment and as a share of value-added GSP.